When news first broke on Tuesday that Italian prosecutors were
investigating the Vatican Bank for violations of anti-money-laundering
regulations, the story seemed to be that the bank had returned to its
old ways. Reports in the press referenced the Vatican's connection to a
1980s financial scandal in which Italy's second largest bank, Banco
Ambrosiano, went spectacularly bankrupt, collapsing under $1.3 billion
of debt amid allegations of involvement by the Mafia and Masonic lodges.
"The Vatican Bank has a very negative image," says Philip Willan,
author of The Last Supper, a book about the death of the Banco
Ambrosiano's chairman, who was found hanging under a London bridge, his
pockets stuffed with rocks and thousands of dollars in cash. "Every time
there's a whiff of scandal, all the papers dig out their files."

The Vatican Bank, a private bank that manages assets
for religious orders and funds for Catholic charities, is estimated to
hold assets worth $5 billion. In this latest scandal, Italian
authorities have seized $30 million from Vatican accounts and placed the
bank's president, Ettore Gotti Tedeschi, and chief executive, Paolo
Cipriani, under investigation. The probe centers on two money transfers -
$26 million to JPMorgan Frankfurt and $4 million to Italy's Banca del
Fucino - that allegedly didn't include all the information required by
Italy's anti-money-laundering laws. According to Italian reports,
prosecutors are trying to find out for whom the money was destined and
the identity of the sender. The Vatican Bank denies any wrongdoing and
puts the missing information down to a "procedural error." (See pictures of the Pope's recent trip to the U.K.)

But the very fact the investigation exists at all is
an indication that the days of Vatican secrecy - at least when it comes
to banking - could soon be over. The worst of the bank's excesses came
at the height of the Cold War, says Willan, when the Catholic Church was
consumed by the threat of the Soviet Union. In a sharply divided world,
the Holy See found itself on the same side as the Mafia, whose Sicilian
vote-buying operations propped up the Christian Democrats against the
communists. Meanwhile, the Vatican's sovereign status and tight-lipped
policies offered Italians an offshore bank they could walk to, ideal for
funneling funds to resistance groups in Eastern Europe or Central
America, or otherwise moving money out of the country. "The feeling was
that anything was justified if it was being done to combat communism,"
says Willan.

The bank's dealings got so complicated that it's not
clear if even the Vatican knew what was going on. In the investigation
following the collapse of Banco Ambrosiano, the Vatican said it was
surprised to find out it was the failed bank's largest shareholder. The
Vatican Bank's then president, Archbishop Paul Marcinkus, avoided trial
by claiming diplomatic immunity, and though it denied any misconduct,
the Vatican agreed to pay $250 million to Banco Ambrosiano's creditors. (See "The Trial of Pope Benedict XVI.")

Today, the worries are different. International
terrorism tops the global agenda, organized crime is more likely to
provide a dirty bomb than help steal an election, and the world powers
are focused on reining in illicit money. The Vatican itself has
previously said it aims to make transparency a priority. Indeed, the man
at the center of the scandal, bank president Tedeschi, was brought in
by Pope Benedict XVI last year and charged with bringing a new level of
openness to the bank's operations. Tedeschi, a member of Opus Dei who
goes to mass every morning, told an Italian daily that he experienced
"bitterness and humiliation" on hearing of the investigation. "We are
available to provide information," he said. "It would have been enough
to ask, instead of slapping it on the front page." (Comment on this story.)

In a statement released Tuesday, the Vatican
expressed "puzzlement and wonder" over the charges and said it maintains
"full confidence" in the bank's administrators. "The necessary
information is already available at the relevant office of the Bank of
Italy, and similar transactions commonly take place with other Italian
banks," it said. The Vatican, which is eager to avoid controversy after
being rocked by the pedophile-priest scandals, stressed that it is
working with the Organization for Economic Cooperation and Development
to achieve the highest level of transparency. (See more on church abuse scandals around the world.)

The Vatican Bank has pledged to bring its practices
up to international norms at the beginning of next year, says Gianluigi
Nuzzi, author of Vaticano S.p.A., a book about the bank's history
of corruption. But, he adds, that's something it will struggle to
accomplish. "The inquiry shows that [the Vatican Bank's] processes are
still not up to par," he says. The door will close on the past, he says.
"But with a great deal of difficulty."